The Freelancer & Contractor Services Association (FCSA) today submitted its official response to HMRC outlining its concerns if IR35 proposals for the public sector go ahead and has included some alternative solutions for HMRC to consider.

The planned new rules will apply to all businesses that supply individuals to the public sector if they are not paid via RTI payroll, i.e. freelancers, interims and contractors who are self-employed, engaged to undertake specific projects. HMRC proposes to make the public sector hirer responsible for determining whether the individual is inside or outside IR35, and this new responsibility can be delegated to the supply chain if the contractor is sourced via an intermediary.

FCSA believes that any reform to IR35 should encourage tax compliance whilst also preserving entrepreneurship and flexibility of the freelance workforce, however the proposals fall short of this aim. They do, in fact, impose liability on a party who has very little information in order to complete an accurate assessment of IR35 which will result in unintended consequences such as the creation of deemed employment, incorrect calculations of tax liabilities and difficulties in PSCs recovering overpaid tax.

Julia Kermode (pictured), chief executive of FCSA, said, “Government is once again proposing changes to an existing system that would successfully deliver all its objectives if HMRC’s existing powers were actually enforced. The proposed change shifts liability for IR35 status from the individual contractor to an unconnected collection of parties who are less well placed to come to any true conclusion about an individual’s working practices. No one party in the supply chain holds sufficient information alone to make a complete and accurate assessment of the application of IR35, so implementing HMRC’s proposals properly will require all parties to share timely information which we believe will be difficult to achieve in practice.”

FCSA believes that a far simpler solution would be to extend the current framework set out in the Treasury Directive PPN 08/151 across all off-payroll workers in the public sector. Evidence suggests that this is working and is encouraging the supply chain to ensure PSCs comply with IR35. Indeed, research undertaken by the Public Accounts Committee indicated that HMRC received satisfactory assurance from 2,248 out of 2,505 cases, suggesting 90% compliance from a tax perspective. [http://www.publications.parliament.uk/pa/cm201516/cmselect/cmpubacc/726/726.pdf]

Should HMRC decide to implement its plans, FCSA proposes that HMRC agrees a 90-day period from the start of an assignment to establish the facts and working practices, which are not known in advance. During that time any payments to the PSC worker should be gross and any tax subsequently found to be deductible is taken from future payments.

Kermode commmented, “These latest proposals are impossible to implement in practice, do not provide a silver bullet, and certainly do not level the playing field. Calculating deemed payments is an annual process with many different factors affecting it, which means that any deductions made by the engager can only ever be provisional. This creates further work, cost and complexity to reconcile the PSC’s corporate and individual’s personal liabilities later, effectively penalising contractors for working in the public sector.

“The public sector is already stretched and relies on the invaluable skills of the flexible freelance workforce. Evidence suggests that the introduction of these reforms will see contractors less likely to choose public sector assignments, which in turn will exacerbate current skills shortages and potentially generate new ones. This is particularly concerning given the work needed to manage the UK’s exit from the European Union, which will require a highly skilled team to negotiate and manage the transition, who by definition will not be permanent employees. It is unthinkable that Government might be prepared to jeopardise this essential workforce at the current time, and I hope that policymakers will listen to our concerns.”